Republican presidential nominee Donald Trump likes to claim that his proposed policies would be good for the little guy.
That’s debatable. Some probably would, others not so much.
But what is certain is that Trump’s policies seem to be very good for the little stock.
Small cap and microcap stocks have been going gangbusters since the July 13 attempt on Trump’s life that gave the nominee a boost in election polls – and made his return to the White House suddenly seem much more likely.
To be fair, the Russell 2000 – a market index of 2,000 small-cap companies – was already trending higher when the gunman nearly killed Trump at a Pennsylvania campaign rally.
That’s because better inflation readings in recent weeks suggest that an interest rate cut by the Federal Reserve is very possible – as soon as the mid-September meeting of the Fed’s interest rate committee. Indeed, futures markets see a 94% chance of a cut at that meeting.
And smaller companies tend to have much higher debt ratios than bigger firms, so falling interest rates should benefit them more.
Tariffs and Taxes
But the upward turn in Trump’s electoral fortunes adds two other factors that could benefit small companies and their shareholders…
First, Trump is talking tough on trade again – with threats of tariffs on China and other U.S. economic rivals. Small firms tend to be domestically oriented, meaning there would be less impact on them from a new trade war (compared to large firms and multinationals that rely more heavily on exports). Indeed, if higher prices on imports cause Americans to buy more domestically produced products, small companies would benefit.
Second, a Trump victory in November would make it much more likely that the corporate and individual tax cuts he pushed through Congress in 2017 – the Tax Cuts and Jobs Act – would be extended beyond the current 2025 expiration date.
While both large and small companies would face tax hikes if that legislation isn’t extended, the impact on the bottom line for smaller firms would be larger.
So an extension of those tax cuts would, relatively speaking, be better for small cap stocks.
Choose Wisely
It’s important to note that not all small caps are alike. By some estimates, up to 40% of the companies in the Russell 2000 index are unprofitable.
So if you’re beginning to think about increasing your portfolio allocation toward small and microcap stocks, be very discriminating. You’ll want to identify the small companies with the most potential to grow out of that category.
You might even consider taking a look at Alexander Green’s VIP trading service, Oxford Microcap Trader. It focuses exclusively on microcap stocks by looking at sales growth, book value, and profit triggers. The stocks in the portfolio currently include one triple-digit gain and six double-digit gainers.
You can find out more about Oxford Microcap Trader here.